Budget Cafe: Tackling IT troubles ahead of GST

The information technology (IT) sector—including IT-enabled Services (ITeS)—has perhaps been both a key benefactor as well as contributor to the nation’s development since economic liberation took place. The growth of this bellwether sector has been concomitant with favourable policy initiatives brought in by successive governments, including tax-holiday-related benefits. In recent times, however, there has been some speculation about the global footprint of this sector potentially shrinking, with the continued phasing out of tax holidays in India coupled with emerging competition from other developing countries in attracting investments into the sector.

On the other hand, the IT hardware manufacturing industry has, in recent times, been a key beneficiary of the government’s ‘Make in India’ initiative. This sector has been blessed with attractive excise duty schemes to incentivise manufacturing of IT hardware, particularly tablets and mobile phones. There is much hope and optimism that these schemes will eventually result in import substitution and create an overall manufacturing ecosystem for the entire value chain for these products.

Against this backdrop, we look at some of the key expectations of the IT hardware and services sector as we approach the Union Budget 2016.

The excise duty concessions announced in the last two Budgets have witnessed interest and traction in the context of manufacturing of mobile phones in India. While the hardware sector is keen for these benefits to be extended to more types of hardware (particularly personal computers, handheld devices such as e-readers, and customer premise equipment), there appears to be cautious optimism at the government’s end in possibly assessing the growth of this sector based on benefits already extended. In addition, it would be interesting to note how the government plans to align these concessions to a GST framework in the coming year(s).

A key continued ask of the IT sector is overall alignment of VAT rates for similar products across states. Issues around classification, and consequently rate, continue to exist, despite minimal slabs under VAT. These issues are more pronounced in the context of emerging technology products with multi-functional features whose primary functionality and consequently classification is sometimes difficult to determine. Importantly, there is a need for alignment of the rate of tax of the main product with that of its accessories and parts. This is currently a huge pain point for a host of IT products across states as it is difficult for the maximum retail price (MRP)/sale price which is for the entire set to be split across the main product (say, mobile phones) and its accessories (say, charger and earphone) for separate VAT rates to be charged. While GST is seen as a panacea for this issue, a resolution shall be contingent on all IT products being uniformly classified under the merit rate or standard rate across all states.

Further, being VAT-related, while this issue may need to be resolved in various state Budgets, industry seeks a policy-level resolution possibility through a Convergence Cell that could holistically determine classification based on the Harmonised System of Nomenclature that can be adopted across all indirect tax laws (i.e. customs, excise and VAT/sales tax) such that this issue is tackled even ahead of the GST regime.

Industry is hopeful that sustaining the current exponential growth of start-ups through a focused scheme will translate into increased investments and sustained economic growth

On the software front, the historical dual taxation of software (particularly electronic supplies of standard software) as both ‘goods’ and ‘services’ remains, with the list of items witnessing such dual levy of VAT and service tax continuing to rise across the length and breadth of intangibles and digital downloads. Whether this long-term aspiration and expectation of the industry gets resolved ahead of the GST with a clear policy statement on their status as either ‘good’ or ‘services’ remains to be seen.

Refund of taxes to exporters, particularly service exporters, is also a key concern of the IT and ITeS exporting community. Recently, this issue was sought to be assuaged through the notification of a special process for issuance of refund of accumulated service tax credits. The scheme envisages sanction of 80% of the claim within five working days, subject to submission of prescribed documents. However, the prescription of a Statutory Auditor certification as a pre-condition for sanction has resulted in few takers for the scheme.

Industry continues to be hopeful of alternate schemes of upfront exemption, rebate/drawback being brought to provide a viable option to the existing long-drawn refund adjudication process for IT/ITeS service exporters.
While expectations are manifold, for most businesses plagued by a host of these historical issues, even a firm statement on GST including an affirmation that these issues shall stand resolved under GST within a committed time frame may meet their expectations.

Both the hardware as well as software services sectors are also hopeful of a specific policy to address teething problems often faced by technology start-ups and SMEs through holistic policy framework and creation of an ecosystem that encourages their easy set up and sustenance. The industry is hopeful that sustaining the current exponential growth of start-ups through a focused scheme shall translate into increased investments and sustained economic growth. The unveiling of the “Start-up India Action Plan” is indeed a positive start to the year and is, expectedly, the first of many steps the government plans to implement to address the various expectations of this sector.